How will uncertainty, mounting challenges shape booming M&A market?

From left to right: Ann Hanna, Mike Malatesta, Rob Dillon and Dan Cahalane at the 2021 BizTimes M&A Forum. Photo by Maredithe Meyer

Last updated on March 21st, 2022 at 10:45 am

The market for buying and selling companies has continued to heat up in recent years. Driven by the aging demographics of many business owners, low interest rates making money cheap and private equity firms looking to put their funds to work, it has been a good time to sell if you were looking for an exit.

The past year took things to even greater heights as President Joe Biden’s administration explored the possibility of raising capital gains taxes. The prospect of a near doubling of the tax rate to 39.6% pushed many business owners into the market.

“Multiples were high, earnings had rebounded on a post-COVID basis, there’s a lot of money out there with private equity firms and ultimately as a result of those kinds of things coming together, we had one of the busiest fourth quarters that we’ve ever experienced, whether it’s our firm or other firms here in the middle market,” said Tim Reardon, a shareholder in the corporate law and tax practice of Milwaukee-based Reinhart Boerner Van Deuren s.c.

Of course, the tax increase did not become reality; and with inflation, supply chain issues, a tight labor market, potential interest rate increases and now the Russian invasion of Ukraine, it is easy to wonder if the boom in the mergers and acquisitions market has come to an end.

Addressing the current state of the market will be among the central topics at the annual BizTimes M&A Forum taking place from 2-6:30 p.m. March 31 at the Brookfield Conference Center. The event is sponsored by Old National Bank, Reinhart and Taureau Group, with supporting sponsor Vistage. Additional information on registering is available here.

Reardon will be part of a sell-side-focused panel that highlights best practices, lessons learned and other experiences from the sale process. Ann Hanna, managing director and founder of Milwaukee-based Taureau Group, will moderate the panel, which will also include Shane Vaughn, president and CEO of KDV Labels; John Topetzes, former owner and president of Pewaukee-based Sanborn Tube and Fab; and Steve Flynn, CEO and owner of S. Flynn & Co. and previously CEO of Elkhorn-based GWW Group.

Following the sell-side panel, a buy-side panel focused on growth trough acquisition will be moderated by Inge Plautz, senior vice president at Old National Bank. The panel will feature Kristin Dufek, president of Milwaukee-based Eppstein Uhen Architects; Dan Druml, vice president, strategic partners at FirstService; Jake Hansen, principal of Milwaukee-based Jacsten Holdings; and Keith Smith, president of Salem Lakes-based Vonco, a Jacsten portfolio company.

The program will conclude with breakout sessions on building sustainable business value, strategically funding acquisitions and navigating family business succession through the M&A process.

As for the state of the M&A market, Reardon pointed out that baby boomers are now between 58 and 78 years old, meaning many are reaching retirement age.

“There are a lot of businesses that are still owned by people in that age bracket,” Reardon said. “What that’s going to mean is that, just based on the demographics, there are a large number of business owners who are going to need to do a transaction in the next few years.”

There are also plenty of private equity firms and other buyers looking for companies to buy or invest in, helping to fuel the market.

“Banks have been supportive and debt multiples have been rising, at the same time we are seeing larger equity checks being written,” Hanna said. “This translates to excess cash available to support transactions and higher pricing. The most active buyers are those with a limited time horizon to grow or invest so they are willing to stretch for deals.”

She also noted a new type of seller, one “motivated by health conditions, uncertainty and burnout as a result of the COVID pandemic,” is increasingly common in the market.

Uncertainty is perhaps the biggest threat to the booming M&A market. Hanna pointed to the invasion of Ukraine and its impact on oil prices, supply chains and agriculture as something that could shape the market.

There is also the possibility of the Federal Reserve raising interest rates.

“In a vacuum, we expect rising interest rates to dampen M&A activity. However, there are so many influencing factors this does not always hold true,” Hanna said, pointing out that rates and M&A activity were both rising from 2004 to 2007.

Reardon said interest rate increases alone would not be enough to slow the market down.

“It may temper multiples somewhat,” he said, suggesting a 6 or 7 multiple may become a 5 or 6 or a 10 becoming an 8 or 9.

“You still have buyers with money, money is still relatively cheap,” Reardon said before adding that supply chain, inflation and labor challenges will add up to limit what buyers are willing to pay.

Would that tempering be enough to cause sellers to pull back from the market?

“I don’t think so,” Reardon said. “I think what we’re going to have is we’ll still have a good healthy pool of sellers. Given the demographics age-wise, they have no choice but to sell. But they won’t be selling at the peak values that they were getting last year.”

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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